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DBS has upgraded its rating on Suntec Reit to "buy" from "hold", citing confidence in management and a bright outlook for Singapore office rents.
DBS also raised its target price on the counter to S$2.30 from S$1.95. Suntec Reit's units traded at S$2.07 as at 9.37am on Friday, unchanged from the previous close.
Suntec's stock has climbed by about 30 per cent over the past year, DBS noted. Analysts, however, have mostly remained cautious on the retail real estate investment trust because of past failures to improve rents at Suntec Mall, the broker said. A downturn in the Singapore retail segment also hurt sentiment.
But Suntec chief executive Chan Kong Leong, who was appointed in January 2017, could be "the catalyst to transform Suntec Mall and close the rental gap between Suntec Mall and other suburban malls", DBS wrote.
The broker highlighted that Mr Chan has deep experience with malls from his previous stint at CapitaLand, and has articulated a "clear and coherent" strategy aimed at improving the performance of the mall. DBS noted that both foot traffic and tenant sales have improved at Suntec Mall since Mr Chan's involvement, and growth rates for both metrics have been the highest among listed retail Reits.
Mr Chan will be helped by a potential recovery in the Singapore retail scene in the second half of 2018, the broker said.
"In addition, with our expectations for a rise in residential property prices and cash injection into the economy following the large en bloc sales in late 2017, we believe a firmer consumer sentiment should translate to a better retail spend towards the latter half of 2018," DBS wrote.
The broker is also predicting sustained growth in office rents, citing easing supply and a quarter-on-quarter recovery in central business district prime rents.
"We believe we are at the start of a multi-year upturn in the Singapore office market until the next jump in supply in 2022," DBS said.
Beyond the fundamentals, there is potential for a possible takeover play with Suntec Reit's now-privatised sponsor ARA Asset Management having the backing of Warburg Pincus and Avic Trust, the broker added.
DBS acknowledged that its new rating on the stock was above consensus, but said that investors should eventually focus on the improving quality of Suntec Reit's underlying distributions and lower capital support.